UMB Financial Corporation — Q3 2010 Form 10-Q
Business context and reporting period
UMB Financial Corporation is a multi-bank financial holding company offering banking, lending, trust, asset management, fund services, and payment services across multiple U.S. states. This unaudited filing covers the quarter and nine months ended September 30, 2010; comparisons are to the same 2009 periods unless otherwise noted.
Financial performance and condition
- Q3 earnings: Net income was $22.8 million, down 5.1% from $24.0 million. Diluted EPS was $0.57 versus $0.59. Return on average assets was 0.82% and return on average equity was 8.31%.
- Nine-month earnings: Net income was $72.0 million, up 9.7%; diluted EPS was $1.78 versus $1.61.
- Revenue drivers: Q3 net interest income was $78.4 million, up 3.3%, while noninterest income was $90.1 million, up 11.9%. For nine months, these were $231.8 million, up 2.9%, and $265.6 million, up 17.1%, respectively.
- Margins and expenses: Tax-equivalent net interest margin fell to 3.23% in Q3 from 3.51% and to 3.24% for nine months from 3.44%. Noninterest expense rose 13.3% in Q3 to $130.6 million and 9.8% year to date to $374.1 million. The Q3 efficiency ratio increased to 75.7% from 71.7%.
- Credit costs: Loan-loss provision was $7.7 million for Q3, down from $8.3 million, but $24.1 million for nine months, up from $20.6 million. Net charge-offs were $15.5 million year to date versus $14.1 million. The allowance was $72.7 million, or 1.59% of loans, versus 1.36% a year earlier.
- Balance sheet and funding: At September 30, total assets were $11.34 billion, loans $4.58 billion, investment securities $5.18 billion, and deposits $8.60 billion. Loans were up 6.2% from year-end 2009; deposits were up 0.8%. Shareholders’ equity was $1.09 billion. Federal funds purchased and repurchase agreements were $1.43 billion, down from $1.93 billion at year-end; long-term debt was $9.0 million.
- Capital: Tier 1 risk-based capital ratio was 12.61%, total risk-based capital 13.78%, and leverage ratio 7.39%. Management reported the total risk-based ratio exceeded the 10% well-capitalized threshold.
- Cash flow: Nine-month operating cash flow was $138.9 million, compared with $127.1 million. Investing activities used $93.0 million and financing activities used $475.1 million; reported cash and due from banks declined $429.2 million to $800.4 million.
Material changes and notable items
- Trust and securities processing revenue increased 22.1% in Q3, reflecting Scout Funds, fund administration and custody activity, and Prairie Capital revenues. Bankcard fees rose 24.7%, associated with acquired credit card portfolios.
- Higher operating costs, especially salaries and benefits, processing fees, and intangible amortization, more than offset Q3 revenue growth. Deposit service-charge income declined, which management attributed partly to new overdraft regulations effective July 21, 2010.
- UMB completed its purchase of substantially all assets of Prairie Capital and PCM on July 30 for $25.9 million cash. The acquisition added $2.2 billion in assets under management and $2.6 billion in servicing assets; recorded goodwill was $32.2 million and identifiable intangible assets were $19.4 million. A contingent earn-out liability was estimated at $26.0 million at acquisition.
- A Reams Asset Management acquisition was pending, scheduled to close November 30, 2010. It included an initial cash payment of $42.0 million, potential stock consideration, and possible earn-outs.
- Available-for-sale securities had $5.06 billion fair value, including $107.0 million of gross unrealized gains and $0.7 million of unrealized losses. Management attributed losses to interest-rate risk and did not consider the securities other-than-temporarily impaired.
- Nonperforming loans were $25.0 million, up from $22.4 million a year earlier; nonperforming assets were $31.8 million. Loans past due 90 days or more were $7.5 million.
Outlook, risks, and contingencies
The filing provides no quantified earnings or financial guidance. Management described priorities of growing fee-based businesses, growing loans and deposits, improving operating efficiency, and maintaining capital while pursuing suitable acquisitions and shareholder returns. Management noted that asset-based fee income is exposed to securities-market movements and that interest-rate changes affect asset yields, funding costs, and margins. The company’s modeled 300-basis-point rate increase projected a $7.1 million increase in net interest income over 12 months; management characterized its position as relatively neutral to further rate changes in the prevailing low-rate environment.
- Risks identified include economic and political conditions, regulation, interest rates, securities-market performance and fund flows, borrowers’ repayment capacity, loan demand and liquidity, competition, technology costs, employee costs, and acquisition integration.
- The Dodd-Frank Act was identified as a risk: implementing regulations and their financial effect were not yet predictable or quantifiable.
- Off-balance-sheet commitments totaled approximately $3.5 billion, including loan commitments and letters of credit; many may expire without being drawn. Management stated that pending lawsuits were not expected to have a material adverse effect.
- The company declared a $0.195-per-share dividend on October 26, payable December 30, 2010. It repurchased 70,799 shares in Q3 at an average $33.98 per share.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether fee-revenue growth, especially trust, fund administration, and bankcard income, persists and offsets rising expenses.
- Trends in nonperforming loans, charge-offs, impaired loans, and allowance adequacy, including the rise in nonperforming assets year over year.
- Integration, retention, earn-out costs, and returns from Prairie Capital, as well as completion and financial terms of the pending Reams transaction.
- Net interest margin sensitivity to low rates, deposit pricing, securities portfolio duration, and the company’s significant pledged securities.
- Potential capital, compliance, and business impacts as Dodd-Frank regulations are implemented.